UPDATE 2-Surprise pick up in Japan output raises hopes worst may be over

Fri Nov 30, 2012 1:28am EST

* Industrial output rises first time since June
    * Projections suggest Q4 rise, first in three quarters
    * October rise mainly due to Asia smartphone demand
    * But PMI falls in November, suggests activity shrinking
    * Core consumer prices steady in Oct, household spending up

 (Adds details, background)
    By Leika Kihara and Tetsushi Kajimoto
    TOKYO, Nov 30 (Reuters) - Japanese factory output
unexpectedly rose in October for the first time in four months,
lifted by robust demand for smartphones in Asia and raising
hopes that the worst of the contraction in the economy may be
over.
    Industrial output increased 1.8 percent and manufacturers
surveyed for the monthly government report forecast a dip in
November but a strong 7.5 percent rebound in December,
suggesting output would rise in October-December for the first
time in three quarters.
    "The data showed the economy is likely to have bottomed out
earlier than expected," said Tatsushi Shikano, senior economist
at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
    Still, a separate purchasing managers' report showing
factory-sector activity shrank in November pointed to a patchy
pick-up that will keep the central bank under political pressure
ahead of Dec. 16 national elections to revive an economy widely
seen as in recession.
    The government compiled an 880 billion yen ($11 billion)
stimulus package on Friday that it said would boost economic
growth by 0.2 percentage point. But with the size of the
spending and its effect seen limited, many analysts expect the
BOJ to shoulder the burden and ease policy again either next
month or in January.
    "Even though the economy shows some signs of a pick-up, the
BOJ may ease policy further as early as next month if, for
example, U.S. monetary easing causes a spike in the yen,"
Shikano said.
    The rise in industrial output defied expectations for a 2.2
percent decline and compared with a 4.1 percent drop in
September, the biggest decline since after last year's
earthquake that partly reflected a Chinese boycott of Japanese
goods following a territorial dispute between the two countries.
    Japan's industrial output has fallen in six of the first 10
months of 2012 and last rose in June, by 0.4 percent. Output is
also well below year-earlier levels, with October's figures
showing a drop of 4.3 percent.
    The economy shrank 0.9 percent in the September quarter and
is expected to drop again this quarter, meeting the popular
definition of a recession, as the country deals with the global
headwinds of debt-ridden Europe and a sluggish U.S. economy.
    In other data on Friday, core consumer prices were flat in
October compared with a year earlier, but the November index for
Tokyo, available a month before the nationwide data, fell 0.5
percent, a sign that an end to a sustained period of deflation
remains distant. 
 
 
    
    SMARTPHONE SUPPORTS
    About three quarters of October's output rise was due to a
14.7 percent jump in production of electronic parts, the biggest
increase since data on the category became available in 1998, as
companies boosted production to meet strong demand in Asia for
new smartphones, such as Apple Inc's iPhone 5.
    Other sectors also fared well including automakers, who had
suffered from the fallout from the diplomatic row with China and
from slumping domestic sales after subsidies for low-emission
cars expired in the summer.
    "The launch of new smartphone and tablet models drove up
output but that's not it. Automobile output is also showing
signs of life, which is a positive," said Yoshiki Shinke, senior
economist at Dai-ichi Life Research Institute in Tokyo.
    "It reinforces the view, shared by the BOJ, the government
and private analysts, that the economy will pick up early next
year, although much depends on how soon exports will recover."
    The data underscores expectations that prospects for
Japanese exporters may be picking up. Tokyo's Nikkei average
 hit a seven-month high on Friday, as a recent decline in
the yen raised hopes for stronger-than-expected earnings
for exporters.
    Electronic parts makers Sharp Corp and Panasonic
Corp rose 1.8 percent and 0.5 percent respectively.   
Camera maker Canon Inc gained 1.2 percent and Nissan
Motor Co increased 0.9 percent.
    Other data also showed encouraging economic signs. Household
spending rose 0.6 percent in October from September, compared
with expectations for a 0.4 percent decline and the jobless rate
held steady at 4.2 percent, in line with forecasts.
    But showing that a recovery is far from certain, the
Markit/JMMA Japan Manufacturing Purchasing Managers Index fell
to a seasonally adjusted 46.5 in November from 46.9 in October,
signalling manufacturing was contracting at the fastest pace in
19 months.
    Ahead of elections for the powerful Lower House of
parliament, Japanese political parties have promised stimulus
packages and other measures to lift the economy.
    Opposition leader Shinzo Abe, which polls suggest is the
front runner to become prime minister after the vote, has called
for much more aggressive action from the central bank.
    The BOJ's next scheduled policy review is Dec 19-20, by
which time the outcome of the election will be known.
    "The upbeat output data may mean the central bank may not
have to ease unlimitedly," Dai-ichi Life Research's Shinke said.
    "Still, political pressure on the BOJ will remain, meaning
it would probably have to ease in December or January."
 ($1=82.155 yen)

 (Additional reporting by Stanley White; Writing by Tomasz
Janowski and Leika Kihara; Editing by Neil Fullick)